Commodity prices have, on average, risen marginally in April, being driven by a
slight appreciation in the energy sector and a considerable increase in base
metals. In general, the different trading patterns of the past month continued,
with precious metals, food-related and agricultural commodities declining.
Within energy, US gas prices continued volatile trading, adjusting the price level
after the cold-snap related price hike at the beginning of the year. The price rise
of Nickel – due to the export ban in Indonesia – and the increase in Aluminium
prices due to long wait times for physical delivery were also notable. Demand
from the major emerging economies is decelerating slightly due to the economic
slowdown in China. With falling global inflation, the need to hedge rising prices
via investments in commodities as an asset class has also become less
necessary.
Trends in selected commodity markets
The price development in commodity groups was mainly influenced by energy –
mainly by crude oil prices – which edged higher in April on average, before again
retreating at the beginning of May. US natural gas prices, however, declined on
average in April, but the on-going development in Ukraine with a view to Russian gas
supply will need close monitoring. The European Union imports around 30% of its
natural gas from Russia with around 15% of this supply arriving via the Ukraine. So far
the impact of the situation has been relatively limited, given that storage levels are
sufficient in the EU after an unusually mild winter, and with the heating season coming
to an end.
Underlying aspects that were driving commodity prices down were the on-going slowdown
in China, with also the OECD economies facing headwind recently. The influence
of political developments - mainly the situation in the Ukraine - supported energy and
agricultural commodities, and the export ban on unprocessed minerals in Indonesia
was supportive for base metals. The trend of falling inflation has further reduced the
urgency to hedge against general price rises. Not only is inflation still below the
average target levels in the major OECD economies, but it has also trended lower in
China, where it fell below 2% to now stand at only 1.8%. In India it has also declined
since the beginning of the year. The waning inflation in emerging economies is also the
outcome of a slowdown in economic output, which itself has led to lower physical
demand. As a sign of potential stabilisation of the slowdown in China, copper prices
have increased marginally by 0.4% m-o-m in April, after witnessing a steep decline in
recent months. The stabilisation of copper prices, however, may also be due to recent
supply disruptions at the beginning of April in Chile, the world’s largest producer.
The continuation of tapering monetary stimulus in the US is also forecast to put
additional weight on commodity prices, due to declining investment in emerging
economies and a reduction in speculative price pressure. However, volumes in futures
contracts of agricultural commodities have risen considerably in the past months,
accompanied by price rises. The same applies to investment volumes in livestock,
while volumes in natural gas and gold have decelerated and investment volumes in
copper have declined. This development has also been mirrored in past months’ price
developments. The switch from some commodity investments into other asset classes
has also become apparent, when reviewing the performance of large equity markets
like the Standard & Poor’s 500.
The expectation of a slowing deceleration in China in combination with rising inflation
levels in the developed economies may have been important support factors for
industrial commodities
recently. It remains to be seen how the near term commodity
price trend will continue as, most recently, developed economies - mainly the US and
Japan - were facing some headwinds as well, with exports to China also slowing
significantly due to the economy’s deceleration. In Japan, the uncertainty about the
outcome of the sales-tax increase is also adding concern about future growth.
The agricultural sector and food-related commodities continued to be driven by
specific issues. The influence of the Ukrainian crisis, in combination with weatherrelated
issues in Brazil, has led to considerable price rises in recent months. Pricing
pressure has abated to some extent, but could flare up again if the situation in Ukraine
worsens.
Base metal prices increased substantially in April. The main support came from nickel,
due to the fact that the Indonesian export ban on unprocessed minerals continued.
Aluminium was also up substantially in April, supported by the fact that warehouse
queues are expected to remain long for some time.
Energy prices have remained almost steady with a rise of 0.3% m-o-m. Natural gas,
however, continued declining by 5.0% m-o-m.
The agricultural sector prices were also retreating slightly, after the political
uncertainties in Eastern Europe in combination with extreme weather conditions in
Brazil supported price rises in the past months. Agricultural products fell by 0.6%.
Base metal prices increased by 3.1% m-o-m in April, with the largest rise in nickel,
increasing by 10.8% m-o-m, after a rise of 10.4% m-o-m the previous month amid the
Indonesian export ban. Iron ore and copper saw some stabilisation in China’s output
deceleration, increasing by 2.5% m-o-m and 0.4% m-o-m, respectively, in April.
Aluminium rose by 6.2% m-o-m, but has seen a correction since the beginning of May.
Within precious metals, both gold and silver declined by 2.8% m-o-m and 4.7%
m-o-m, respectively.
In April, the Henry Hub (HH) natural gas price index settled 24¢ or 5% lower at
$4.6 per million British thermal units (mmbtu), after trading at an average of
$4.9/mmbtu in the previous month. However, prices are still significantly higher than at
the beginning of this year. US natural gas futures fell as milder weather, the return of
nuclear units from spring maintenance and a healthy addition to gas in storage
lessened immediate concern about ongoing low inventory levels.
The US Energy Information Administration said utilities put 82 billion cubic feet (bcf) of
gas into storage in the week ended 25 April, which was above analysts' forecast of
75 bcf as well as the 41-bcf injection last year and the 58-bcf five-year average
injection. Gas in storage stands at 981 bcf, still an 11-year low for this time of year.
That means utilities will have to inject record amounts of the fuel to rebuild stocks to a
healthy level that will avoid price spikes later this year. Analysts expect utilities put
much less gas into storage due to stronger-than-normal heating demand in the East
and stronger-than-normal cooling demand in the West. Early estimates of injections
range from 62 bcf to 70 bcf with an average of about 65 bcf. That is below the 81 bcf
injection during the same period last year and the five-year normal injection of 72 bcf.
May is historically the heaviest injection month of the season, making it a critical month
for companies to add to storage before rising summer temperatures boost gas use by
power generators to meet cooling demand.
Investment flows into commodities
The total open interest volume (OIV) in major commodity markets in the US increased
slightly by around 0.15% m-o-m to 8.7 million contracts in April as agriculture and
copper OIV’s improved by 2.9% and 1.4%, respectively. Crude oil, natural gas,
precious metals and livestock OIV’s were down by 0.3%, 4.9%, 4% and 5.1%,
respectively. Gold OIV decreased sharply this month by 9.6%.
Total net length speculative positions in commodities increased by almost 2%
m-o-m to 1,636,230 contracts in April amid mixed activities, with moderate increases in
crude oil positions and a significant drop in net length of natural gas and precious
metals.
Agricultural OIV was up 2.9% m-o-m to 4,418,306 contracts in April. Meanwhile,
money managers’ net long positions in agriculture continue to increase by almost 10%
to 915,419 lots in April. The move took place as the futures market soared 4% late in
the month on fear of a possible loss of output from cane crop damage in Australia and
Brazil.
Henry Hub natural gas’s OIV decreased further by 4.9% m-o-m to 1,107,492
contracts in April. Money managers decreased their net length positions again by a
hefty 19% to stand at net long positions of 111,963 lots as the winter heating season
demand diminished and storage rose to healthy levels.
Copper’s OIV increased 1.4% m-o-m to 155,833 contracts in April as investors
reduced their net shorts by 14% to 12,846 contracts. Nevertheless, weak demand from
downstream sectors continued weighing on the recent performance, indicating
investor's concerns about the outlook for the metal.
Gold’s OIV decreased by 9.6% m-o-m to 367,755 contracts in April. Hedge funds and
money managers cut their bullish bets in gold futures and options, as expectations of a
stimulus cut by the Federal Reserve dented the metal's appeal as a hedge. Strong
US home sales data sent gold prices briefly below key technical support at $1,270 an
ounce, paring the gains made on concern about increasing violence in Ukraine.
